What Is Blockchain and What Does It Do?

Blockchain has earned the dubious honor of being both one of the biggest buzzwords in the tech industry and one of the most widely misunderstood. While it is rightly associated with cryptocurrencies, its application in many other areas of business is growing. For any business looking to jump on the blockchain bandwagon, it is important to first understand its current use.

What Is a Blockchain?

Michael Foster is the co-founder of the decentralized trading platform localethereum.com, a private peer-to-peer platform trading ether for local currencies. Foster said the current use of the term has become largely meaningless in 2018 because of its frequent use. However, the basic concept is straightforward enough: A blockchain, he said, is an immutable public ledger. Blockchains let us agree on the order of a set of records without trusting a central authority.

Blockchain technology has proven to be a tremendous invention, but it was never meant to be the be all and end all to security. The mechanisms that Ethereum and Bitcoin use to verify information (known as EC cryptography) have been widely used for decades. Foster explained: “When there is an advantage to having a public immutable record of something, blockchain is the answer. When there isn’t such benefit, it doesn’t make much sense to use a blockchain (stand‐alone cryptography is the solution to your problem). In fact, needlessly adding blockchain to the mix only creates *new* problems, mostly to do with cost, privacy and speed.”

A Simple Database, With So Much More

Behind all this, though is a simple database, according to Marc Baskin, CEO and founder of Morristown, N.J.-based Cryptokist. The blockchain, he said, in its simplest form is a database, like Microsoft Excel, but its attributes make it a superior product that eventually nearly all business models can take advantage of.

It is called blockchain because information is stored in blocks. Once information for a single block is finalized and added to the ledger, the ledger turns a page and starts a new block. You can look back through the connections in a chain of blocks in a way similar to viewing a family tree. The public blockchains (such as Bitcoin and Ethereum), Baskin explained, are:

Distributed (through a Peer-to-Peer network): It’s like an Excel sheet that the whole world can access and add data to, or closer, a Google Sheet that everyone has permission to see and interact with.

Transparent: Since its on tens of thousands of computers, it’s completely transparent to everybody. When transactions get recorded on it, they cannot be hidden from the public.

Immutable: Transactions can be added to the blockchain but cannot be removed, edited or deleted. Computers on the blockchain network lock in the transactions on this ‘database’ through a unique and complex cryptographic process.

Verifiable: These computers also look at the entire database to make sure the transactions haven’t been tampered with and to verify balances.

Unhackable: Because of the above reasons, it is virtually unhackable. In cases where bitcoin gets stolen from time to time, it is always a flaw in the applications that are built on top of the blockchain, such as wallets, cryptocurrency exchanges, etc., and not the blockchain itself.

Blockchain’s Allure: Secure and Trustworthy Data

For all of these reasons, blockchain has made data secure and trustworthy in a way humans are not. The true discovery by the person or group known as Satoshi Nakamoto — the name used by the unknown person or persons who developed bitcoin, authored the bitcoin white paper, and created and deployed bitcoin’s original reference implementation — was the power of the blockchain. Cryptocurrencies are just the first “killer apps” for blockchain, just as email and AOL chat were among the first “killer apps” of the internet in the early ’90s.

Legitimate, and in particular, large, multinational companies, even financial institutions, are excited about the power of blockchain rather than cryptocurrencies, because of the security the database provides. Several use cases for businesses have emerged along these lines:

A Step By Step Walk Through the Blockchain

Blockchain technology clearly offers much more than secure exchange of monetary values. Data such as goods, property deeds, important documents, votes, etc. can all be managed in blockchain. And the rules governing these new digital assets can be much more complex than just owner can transfer value.

“Blockchain technology enables us to implement use cases where the data can be as simple (e.g. cryptocurrency) or as complex (e.g. bill of lading documents) as we desire,” said Everett Stern, founder and intelligence director of Philadelphia-based Tactical Rabbit Tactical Rabbit. If Stern’s name sounds familiar, you may know him as the whistleblower who provided information on HSBC money laundering operations for terrorist organizations, or as an independent candidate in the 2016 U.S. Senate race in Pennsylvania.

Instead of recording all account and transaction data through one central server location, the blockchain requires users to maintain a full copy of the ledger on their computer, Stern said. He walked us through a cryptocurrency exchange example to explain how the process works.

The blockchain user interface in question automatically downloads a full ledger copy for each user. When the participant’s wallet has a verified copy of the ledger, the core data is confirmed and shared by all users. When a blockchain payment occurs, the value moves from one person to another person (P-2-P). Seconds after this transfer, the wallet automatically broadcasts that transaction data to all connected users in the network. The blockchain software protocol groups all individual transactions in blocks, and about every 10 minutes a new block is published to the chain and broadcast to the entire network. Once released, the blocks cannot be changed or altered. Blockchain users also require a software interface for an online connection to the network.

However, when users log in, they are not connecting to a central location. When a Bitcoin user goes online, the wallet interface connects their computer with other Bitcoin users through a massive decentralized network. Transactions on the blockchain move from one party to another without any outside supervision or control.

“Over the years, Bitcoin users have made significant advances in the network software. In 2018, many consumer wallets are much more convenient and do not require a full download of the blockchain. Only users operating a ‘full node’ on their computer are still downloading a full copy of the blockchain. Having a full node provides some benefits for a user,” Stern said.

Because so many copies of a blockchain’s digital ledger exist, with each one being automatically updated and compared, it is virtually impossible to reverse a transaction or alter the ledger. Every transfer, small or large, is broadcast to every individual copy of the ledger. “Through this comprehensive documentation, it is impossible to locate all of these copies and alter or reverse an entry before being discovered as a fraudulent transaction and discarded,” Stern added.

Blockchain know-how must meet industry-specific know-how for it to become more widespread and economical. However, that process is already happening within several industries who are extending its uses beyond cryptocurrency. We’ll look at those industries in a follow up.